The significance
of the 200-DMA
Here is an extract from commentary
that was posted at www.speculative-investor.com on 23rd October 2002.
During September we said that gold
stocks were likely to experience a sharp correction and nominated the 200-day
moving-average for the Amex Gold Bugs Index (HUI) as a reasonable objective
for the correction [the HUI was trading at around 130 at the time]. On
Thursday 10th October the HUI spiked below its 200-DMA, but closed above
it. The same thing happened on Thursday 17th October. Then, on both Friday
18th October and Monday 21st October the HUI closed below its 200-DMA before
rebounding strongly and closing well above this moving-average on Tuesday
22nd October. On 23rd October the HUI pulled back and closed right at its
200-DMA.
So, what is the significance of the
HUI's recent short-lived breach of its 200-DMA? Also, will a future breach
of the 200-DMA have dire consequences for gold stocks?
In an attempt to answer these questions,
let's take a look at the below long-term chart showing the S&P500 Index
and its 200-DMA. Each green arrow on the chart identifies a move from above
to below the 200-DMA during the great bull market of 1982-2000, while the
red arrow identifies the solitary break from below to above the 200-DMA
during the bear market of 2000-2002. It is clear that breaks below the
200-DMA did not signal major problems while the bull market lasted. In
fact, there were 14 definitive breaches of the 200-DMA between 1984 and
2000, but only the last one (the one that occurred in September of 2000)
turned out to be a harbinger of bad things to come. The first 13 breaks
below the 200-DMA turned out to be good buying opportunities! Furthermore,
the break above the 200-DMA that occurred earlier this year was certainly
not a harbinger of good things to come. In fact, it marked an important
peak and turned out to be a wonderful selling opportunity.
Now let's take a look at the below
chart showing the HUI and its 200-DMA since the beginning of 1997. Each
of the green arrows on the chart identifies a move from above to below
the 200-DMA during the HUI's bull market whereas the red arrows identify
moves from below to above the 200-DMA during the preceding bear market.
The chart shows 9 red arrows, that is, 9 breaks from below to above the
200-DMA. The first 8 of these 'upside breakouts' turned out to be good
selling opportunities. Furthermore, the first break below the 200-DMA during
the HUI's bull market, which occurred in November of 2001, turned out to
be a great buying opportunity.
See the pattern? During a bull market,
breaks below the 200-DMA tend to represent good buying opportunities.
During a bear market, breaks above the 200-DMA tend to represent
good selling opportunities. The challenge, of course, is to be able
to weigh all the evidence and arrive at a high-confidence conclusion as
to whether the previous major trend is still in force because every break
of the 200-DMA will be a false signal...until the last one.
Further to the above and as we've mentioned
a few times over the past 2 weeks, we think the recent break below the
200-DMA by the HUI provided a good buying opportunity. Also, if the S&P500
Index manages to claw its way back to its own 200-DMA at some stage over
the next several weeks then we think a great selling (or short-selling)
opportunity would be knocking at our door. This is because all of our work
leads us to conclude that the major trend for gold remains up and the major
trend for the stock market remains down.
Regular financial market forecasts
and
analyses are provided at our web site:
http://www.speculative-investor.com/new/index.html
One-month free trial available.
|
